Budget minister Jean-François Copé confirmed on Wednesday an enquiry had been launched, following an article published by the financial news daily Les Echos.

"It is true that in the first six months of the year we found unusual flows of merchandise between the United Kingdom, France and Poland which justified the launching of an investigative procedure," Cope said.

The fraud depends on a company or individual obtaining a VAT registration that allows for goods — typically small, expensive electronic items such as mobile phones or computers — to be imported tax-free from other EU member states.

The goods are then sold with VAT included but the tax is not reported or paid to authorities, depriving them of revenues.

After shipping the goods to another country, exporters can also reclaim VAT paid along the supply chain, multiplying the losses to governments' coffers.

Criminal organisations are suspected of circulating merchandise among a group of complicit companies in several countries in a practice known as "carousel fraud".

According to Les Echos, the amount of lost VAT can reach up to EUR 13-19 billion per year. This is more than a tenth of France's annual total VAT tax receipts — forecast to be EUR 127 billion in 2006 and EUR 133 billion in 2007, according to the Financial Times newspaper.

Copé discounted the figures given by Les Echos and said France had suffered "no loss of tax receipts from commercial flows across its territory".

In Britain, finance minister Gordon Brown said on Wednesday that his country and France had agreed on a VAT mechanism known as a reverse charge that should add around 500 million pounds (750 million euros, 980 million dollars) to state coffers in 2008.

"The reverse charge will remove the mechanism for stealing VAT on around 90 percent of goods," Brown told lawmakers on the Treasury Select Committee.

Under the new system, VAT will be collected only when items are sold by retailers, who will face controls by tax authorities.